Is your manufacturing sourcing strategy eroding your competitiveness?

Overview

The semiconductor industry today faces a monumental challenge: putting the brakes on a ballooning cost structure that is making many fabless companies uncompetitive. According to Accenture Strategy analysis, as much as 80 percent of a fabless company’s revenue is eaten up by the cost of goods sold (COGS)—and the situation is only getting worse. In 2014, top fabless companies spent nearly $33 billion on COGS. That’s up a startling 65 percent from 2010, and it’s caught the attention of investors who increasingly are calling on companies to take action.

Key Findings

COGS at fabless companies have skyrocketed in recent years for several reasons:

Most companies focus on one manufacturing sourcing strategy and optimize it to become highly efficient, but that compromises their flexibility to make necessary operational changes to control expenses.

Too many companies default to the Known Good Die model, and pay the associated management fees, because it’s convenient—but that unnecessarily adds 2 percent to 4 percent to their cost structure.

Many fabless companies aren’t deploying the optimal strategy for their business because they use the wrong criteria to determine which sourcing strategy to adopt.

In short, fabless companies are squandering millions of dollars and eroding margins because of inefficient manufacturing and testing of chips—and that must change for companies to restore competitiveness and profitable growth.

Recommendations

Fabless companies should embrace a hybrid, flexible approach to manufacturing sourcing. This enables them to switch between Known Good Die and Wafer Buy strategies when business conditions require to maximize each strategy’s strengths and positive impact on profitability. Three actions are critical to generating the greatest benefit from such an approach:

Implement the business processes and systems capabilities needed to support each manufacturing sourcing strategy

Use a product’s technology and position in the product lifecycle to determine which strategy to use when

Monitor the performance of each strategy to ensure the company attains its desired cost and product delivery targets

Syed advises companies in the Communications, Electronics, High Tech and Semiconductor industries on the development and deployment of growth and transformation strategies. With more than a decade of consulting experience, he specializes in business and operational strategy development, mergers and acquisitions, international expansion, supply chain management, fixed asset management and organizational change management. Syed is based in Austin, Texas.

James helps Communications, Media and Technology companies around the world develop and execute transformation initiatives that enable them to respond to changing customer demands and market opportunities. He focuses on the areas of customer care, operations, mergers and acquisitions, digital disruption and business strategy, and is a prolific author on topics related to supply chain and organizational performance. James is based in Atlanta.

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